I was recently asked to moderate a panel on building chatbots. I was joined by a number of entrepreneurs in the NYC chatbot ecosystem - Marah Lidey, Co-CEO/Co-Founder at Shine Text; Jake Cohn, CEO/Founder at And Chill; David Hu, VP, Engineering & Strategy at Dexter;Max Koziolek, CEO/Founder at spectrm). We discussed a variety of the issues in bot-building today.

The biggest takeaway for me is that bot developers and businesses looking to use bots are still trying to figure out the right combination of technologies and use cases that will resonate with end users. We're still in the early days, and it will be interesting to see what killer apps emerge from the noise.

Click here for videos of the other panels from this year's Inbox Awesome conference.

Your first priority is to build a valuable business. This leads to an obvious question: for whom are you building that value? The easy answer is employees, customers and partners, but let’s not forget about the founders and investors who are likely your biggest shareholders. Traditional thinking says “build the value and the exit will take care of itself.” I’d like to challenge that thinking.

I agree that the majority of your time should be spent building a valuable company, but I’d like to propose an additional priority. You should be spending some time strategizing around how to get acquired because companies don’t sell themselves and acquisitions don’t just happen. It takes your attention and effort.

Here are five steps that can help make an acquisition more likely.

#1 Recognize that getting acquired is not an accident

You won’t just wake up one morning to an email from a potential acquirer with a term sheet. None of the acquisitions that I have been a part of (either as an entrepreneur or VC) have been accidents. They took many months and sometimes years of planning to make them happen. Those CEOs understood that acquisitions don’t just happen. They were well thought out, long-term strategies. Yes, there was some luck involved — sometimes a lot of luck — but without the planning all the luck in the world wouldn’t have led to anything. The CEOs put the company in a place where they were attractive to an acquirer and that was a conscious, strategic effort, not an accident.

#2 Make a list of potential acquirers

CEOs should make a list of potential acquirers and understand why each might acquire your company. Acquirers are looking for many things:

Technology to incorporate into their product

Products to sell to their customers

Customers to sell their products to

Revenue/profit to add to their top/bottom line

Defense against losing their customers

Teams that can advance their own initiatives

Intellectual property to strengthen their market position

and many more

By understanding why someone might acquire your company, you are better able to frame your plan.

#3 Do business with potential acquirers

Few acquirers come from out of nowhere and make multi-million dollar offers to acquire companies with whom they have no previous relationship. Acquirers are generally watching their M&A targets for an extended period of time and often do business with them.

Acquisitions typically start with some business development initiative and then move to corporate development for acquisition discussions, not the other way around. Someone from BD typically mentions a great partnership with a company to the corp dev, or corp dev hears about a company and then asks BD about them. That is why it’s important to make it a point — without sacrificing your business — to do business with your potential acquirers.

#4 Be prepared for false alarms

Ideally, companies are bought, not sold. Never advertise your company is for sale. Everyone knows your company is for sale at all times (for the right price.) When asked, always respond by saying that you aren’t for sale and are very excited to build a big business. That said, potential acquirers act on their timeframe, not yours, so be open to overtures; not eager, but open. After all, it is your obligation as the CEO of the company to entertain serious offers.

Don’t get too excited when potential acquirers come calling. Sometimes they are just “kicking the tires” without serious interest. Sometimes they need time to “fall in love” with your company. Sometimes they are serious and are testing if you are desperate. Whichever it may be, always be respectful, give the relationships some time to figure out their motives, and be ready to politely walk away if you feel they aren’t serious yet.

#5 Bankers come in handy

Bankers are an important part of the acquisition process in helping companies navigate the treacherous acquisition process. However, bankers serve an important role even before a serious inbound offer. They constantly speak with potential acquirers about the industry, sharing great companies in the space and suggesting who might be a good acquisition.

Meet with bankers and tell them your story. Give them insights that make them look smart to potential acquirers. Then, when an offer arrives and it is time to formally engage a banker, you have an established relationship. This can save a lot of time because bankers will already know your story when it’s time for them to run an M&A process.

Final thought:

Getting acquired is not a science. Yes, great companies have an easier time of it, but even they need to understand that acquisitions don’t just happen. Like any other part of your business, if you want to be successful you need to spend some time on it.

Things have been really heating up since we saw the first wave of “conversational UI” companies in early 2015, and now there isn’t a week that goes by where we aren’t pitched a new chatbot app. While plenty has been written about the space, my sense is that there is still a great deal of confusion in the market. Many of the chatbot entrepreneurs I have spoken with recently still haven’t thought through some of the basic questions around the viability and positioning of their product within the broader marketplace. In this post, I’d like to share a few of the common questions that I have been asking chatbot entrepreneurs and offer some thoughts around each. (Despite Genacast’s focus on B2B, parts of this blog may still be applicable to consumer-oriented bots.)

Where in the vertical stack are you creating lasting value?

This is a difficult question to answer in any emerging sector where competitive dynamics are still evolving, but it’s important for founders to present thoughtful answers to this question.

AI Funding History from CB Insights

With all of the NLP offerings announced from the Big Tech players (Google, IBM, Facebook, to name a few) in the last six months and the enormous amount of VC funding that has gone into AI tech, it has become a lot harder to build a value proposition simply around “better NLP”. If your startup is building NLP models from scratch, you should have an thorough explanation for why solutions like Wit.ai and Watson fall short and why you have chosen to reinvent (parts of) the wheel. While we’re still excited about highly technical teams that continue to push the boundaries on artificial intelligence, it’s important for us to understand what is it about your team or data collection that allows for superior results and how you are bench-marking your scores.

Another value proposition frequently heard is in tailoring basic semantic text analysis to specific use cases. I have heard from many founders that the defensibility of their business lies in being first-to-market in collecting data from a specific set of conversational interactions and that this training data is a significant barrier to entry. The idea here is that the more data you collect, the more conversation paths you can account for in automation, and the more scalable the solution. If this is your approach, be prepared to give an honest answer about what it’s going to take to train the model on these use cases and how you will be able to acquire this data in a capital efficient manner.

We’ve seen a number of companies attempt a human/bot hybrid with the goal of automating human activity over time by categorizing responses and prioritizing development resources on the automation tasks with the most bang for the buck. The virtual assistant for scheduling space is a great microcosm for this, and we’ve seen the staggering amount of capital required to pull this off within a narrowly defined use case. While it is still early days, the expense in scaling human moderation, the rarity of AI engineers, and new paradigms in bot development have made this approach a questionable choice for new companies.

I also want to know how important it is to have super-strong, tailored NLP models in the first place. As a general rule of thumb, 85% precision is more than adequate in many closed systems. The difficulty for competitors to hit this mark may be many times (read: many engineers) simpler than 95%+. In certain cases, the set of reasonable user queries may be much narrower in scope and an optimized solution might even be a rules-based response engine using regular expressions to parse for keywords.

Who do you compete against inside and outside of the messaging medium?

For folks new to this, the answer to “who do you compete against?” is almost never “no one”. In the case of chatbots, you should be familiar with a number of players in the space and associated risks.

If there is a Slack bot or FB bot with your functionality already, explain why your solution is better and why your competitors can’t easily copy your features or user acquisition strategy.Beyond bots, I’m interested in who is offering a similar solution in more widespread mediums like web or mobile. In what way does the conversational aspect of your solution create a significant improvement over those existing solutions? There isn’t one right answer but I want to hear a thoughtful answer around the advantages of the medium itself so that I know this is more than opportunistic move on a new trend.

With the rise of bot creation platforms and bot developer kits, has it become possible for a non-technical founder to replicate the key features of your app? Many of these platforms use a number of pre-built templates, plug-and-play modules, integrations into various cloud services, and NLP baked in. If your startup’s advantage is in its ability to provide more customized experiences, tell me how you plan to maintain that edge over time as these services get better.Another consideration is a close cousin of these bot platforms, the cloud workflow orchestration platform. A number of more mature companies that play in this space could very well pivot to support chatbots should the market take off.

The most dangerous competitor, however, is the product your app was built to support. If your chatbot is a conversational layer over a cloud-based service, your dependence on that underlying technology is a major risk. Twelve months ago, no one expected established cloud platforms to introduce their own AI-based conversation services. Today, many large enterprises are aware of the trend and have developed strategy around it. Whether you’re build as a skin over Salesforce, Shopify, or Zendesk, the existential risk in competing against this group is going to be a big concern. You should be able to address it head on.

“The plan is to extend this beyond email. Zendesk is multi-channel and we’d want to include this in chat, voice, social channels and more traditional channels. We’d like to expand this to everything.”

What is the ideal medium for this service?

Conversation can be a very productive medium for delivering business services, but limiting interaction to conversation is often an unproductive experience.

Does the solution need to be 100% in text? How do the addition of manual steps, yes/no buttons, or simple forms to the message stream affect the user experience? Making your “invisible app” slightly more visible can cut development time down quite significantly as you reduce the complexity in user queries.

I’m also keen to hear your thoughts on what platforms you’ve chosen to build on, whether it’s Slack, Facebook, Telegram, SMS, or otherwise. How do existing business processes tie into this decision? I want to get your view on how the market will play out for each of these platforms.

What does it take for this to become a big company?

Half of this question is “does this scale?”. I’ve touched on the challenges in scaling the technical architecture already, but this is also a question around go-to-market.

At this stage in the bot ecosystem, there are a number of challenges in customer acquisition. We’re still in very early days: there is a lot of buzz around the conversational service layer right now but not a lot of end user demand. Discovery is also an issue. It isn’t easy to find bots on Facebook unless you know what you’re looking for so it’s a bit of a wild west there at the moment. None of the existing “bot stores” have a mature interface for finding new bots and there aren’t any natural ways to market your bot yet. One approach that seems to be working for acquiring early customers has been working with distribution partners such agencies or legacy vendors.

The other part of this question is around market timing. For investors, being too early to an opportunity is the same as being too late. Today, there are a number of solutions that are gaining some traction on Slack, but I haven’t been able to find many instances of paid bot usage at the companies I’ve spoken to. I’m interested in hearing your perspective around when and how the end user demand will pick up.

I’m also watching the consumer bots space closely. I started conversations with a number of FB bots in the last few weeks. For the most part, these experiences have been disappointing, and surprisingly, many of the bots from big brands have not responded at all! (Side note: a big challenge for any bot platform is in vetting bots. Unlike mobile apps, some platforms aren’t able to see when developers push updates to their bots, as the backend mechanics of the bots are often hidden in a black box.) If my experience is any indication of the general quality of consumer bots, there’s also a risk that enthusiasm for B2B bots may dip before it picks back up due to preconceived notions of the new medium. Because of the market adoption issues, it may be helpful to have a contingency plan for the business in the event that a rising tide doesn’t arrive to lift all boats.

Final note:

At Genacast, we’re excited by the promise of bots for business. We believe there are a number of inefficient processes that can be creatively solved through the mediums of text and voice. If your team is building a new B2B-focused chatbot, I look forward to getting in touch.

CB Insights recently published an article titled "Attention Seed-Stage Founders: Which Micro VCs Have The Highest Follow-On Rates?" that discusses the general performance of institutional, seed-stage VC funds (CB Insights calls us Micro VCs) and benchmarks these funds based on their Series A follow-on rates. For founders, this isn't an ideal method for comparing funds, but the lack of transparency around deal terms and fund returns means this is as good of a proxy as any to compare potential investors to partner with.

Their findings were quite surprising. According to CB Insights, the average follow-on rate for Micro VCs between 2010-2014 (after netting out acquisitions prior to additional funding) was 20%. This means that founders who jump through all the hoops of raising their first round of institutional funding have only a 20% chance of closing a follow-on Series A round. The seed numbers for traditional VCs that also invest at later stages were very similar at 19%.

These findings made us review our own portfolio to see how Genacast Ventures stacks up. Using the criteria outlined in the article, our seed-stage investments since inception have had a Series A follow-on rate of 75%. By removing those companies funded in 2015 and onward that still have cash reserves, the follow-on rate jumps to 92%.

Top Micro VC Investors

The article also attempts to assess the quality of follow-on rounds by counting the follow-ons from smart money, defined by inclusion in CB Insights' list of the top 20 venture capital firms. According to CB Insights, "Attracting follow-on financing from top traditional venture funds, which have large bases of capital and high historic success rates, undeniably increases the long-term probability of success for a startup." Against these criteria, our portfolio companies topped the list again with a smart money follow-on rate of 58%.

Top "Smart Money" Follow-on Rates

There are a number of reasons why I think our approach to the seed-stage shows strongly against these metrics, some of which we will break out in more detail in following posts. At its core, we strive to be hands-on partners for entrepreneurs in the formative years of their companies, and the focus of our companies on long-term value creation seems to have struck a chord with the market.

When venture capitalists (VCs) evaluate entrepreneurs seeking funding, they look for two things -- a big opportunity around a technology/product and a strong, well-lead management team. Which of the two is more important? The age-old debate still rages on. Does one bet on the horse (technology/product) or the jockey (founders/management)?

At the beginning of the funding process, at least in the early pre-seed, seed and Series A stages, for many VCs, it is essentially all about the jockey. The best of ideas in pursuit of the most lucrative markets will probably not overcome poor leadership. On the other hand, Arthur Rock, a legendary VC known for early investments in Intel and Apple, has said that “a great management team will find a good opportunity, even if they have to make a huge leap from the market they currently occupy.”

If management strength is the earliest most important determinant of a startup, then it stands to reason that the founder is the most important component of management. Assuming that the founder has, at least on paper, solid enough credentials to get to the point where his or her idea is seriously considered for funding, it behooves the VC to get a solid handle on the general aspects of the founder’s personality.

We spoke with some of the leading VCs in New York about personality types, specifically, what kinds of personalities VCs look for in entrepreneurs that they want to fund... and what tends to send up red flags.

1. Age is just a number.

In psychology, the “Maturity Principle” concept says that people become more agreeable, more conscientious, and more emotionally stable as they age. While these are all generally positive attributes, to assume that personality issues become less of a risk factor with older founders kind of misses the point. The fact is, age is largely irrelevant when it comes to evaluating entrepreneurs.

“A founder should be the type of person a team can respect and look to for guidance and leadership, and often that requires a certain degree of maturity that comes with experience,” says Bob Goodman, General Partner of Bessemer Venture Partners. “However, some very young founders have become exceptional CEOs by learning fast and cultivating an A+ group of supportive advisors.”

Gil Beyda, a veteran VC at Genacast Ventures, agrees. “Age is unimportant. However, if looking for businesses to be disruptive, maybe we’re looking for someone who is a little bit more adventurous, and that might mean somebody who is younger, on the other hand, if we’re looking for somebody who has deep experience in a space, the right fit may be someone who’s older, who has a little more experience, who brings a deeper understanding of the problems felt by potential customers. Someone who potentially was a customer.”

2. Get culture right and get it right fast.

According to Josh Wolfe, a Co-Founder of Lux Capital, the first three people on a startup management team “set the DNA, and are effectively the parents, setting the tone, the intensity, the values, the ethics. And, every new employee -- even if not subservient to a hierarchy -- is like a toddler watching its parents for cues of how to behave.”

Goodman adds, “If an executive doesn't exhibit behaviors you want emulated by the rest of the team, it might be time to look elsewhere.

Gil Beyda adds, “by the time headcount is 10 to 12, you’re probably 80 percent fixed on the culture for the company. Potentially there are some key senior hires that are made after 10 to 12, there’s some potential for some readjustment, some shifting in the culture, but I think you need to have a pretty good idea of where you want to go, what culture you want to have in the first handful of hires, because I think it gets incrementally more difficult to change the culture.”

3. So, what’s your story?

Personality is shaped by personal experiences. So, how much does the personal history of an entrepreneur weigh into a VC’s decision to fund or not? Not so heavily, as it turns out. At least not in the early stages. According to Wolfe, “what we try to understand is what is driving this person? What experiences inform their judgment? How might they behave under conditions of uncertainty in the future? How will they recruit and retain people? Since all the personality-related questions that matter are future unknowables, our only way to decide to invest is based on our best judgment of the people -- which itself is of course a pastiche of our own idiosyncratic experiences.”

Quite simply, “a founder's personal history isn't as important as proving that the team they've assembled is the right fit to address a large, promising market,” says Goodman.

4. Startup veteran or unconventional thinker.

On the one end of the spectrum is the serial entrepreneur. The startup veteran who offers a clearly viewable track record of success, failure, or both. Their personality type can be observed and assessed, previous decisions analyzed and though-processes discussed. On the other side you have the first-time founder, untested, unknown, and offering, in many cases, some kind of unconventional insights.

The question is, what might cause a VC to tend to orient toward one or the other when deciding to fund or not?

“Every successful entrepreneur needs deep empathy with his or her target customer and a sizable chunk of grit and determination to make it through tough times,” says Goodman. “Generally this comes from founders who have lived the problems they're solving and have a history of succeeding despite big setbacks, but they don't necessarily have to be a serial entrepreneur.”

Wolfe says that “some entrepreneurs that do it all over again may have a playbook, and can do the right things faster and avoid the wrong things sooner, or at all, but they also risk being generals fighting the last war, and being authentic and unconventional are great…to the extent they inspire their team or make strategic decisions that trump competitors.”

According to Beyda, “the first-time entrepreneur has a particular insight into a space, into a problem, into a technology that has the potential to disrupt a space, that’s what gets me excited. I can also get behind the serial entrepreneur… if they have that unconventional insight, for me, it’s all about that unconventional insight which to me as VC is the nectar that I live on. Somebody who walks in the door and blows me away with a point of view that is radical.”